Hugh Young: An insider’s view of Asia
Merryn Somerset Webb Aug 24, 2012
When I interviewed CLSA Asia Pacific broker’s guru Russell Napier a few weeks ago, we agreed that one of the most interesting things about the rolling financial crisis is the way in which it has left most fund managers with no real opinions on anything. But this isn’t really a problem for this week’s interviewee.
China isn’t cheap
We start with China. A good many analysts think the Chinese market is now so cheap it’s a raging buy, regardless of the political or economic environment around it. Young isn’t convinced. Aberdeen has never had much money directly invested in China, he says.
Why? It isn’t about the macroeconomics. Young isn’t much interested in the argument about whether China’s economy will see a soft or a hard landing. And beyond considering the idea that the renminbi is desperately undervalued as “the biggest myth” in the market, nor is he much interested in the arguments over currencies either. Instead, he says, it’s because it’s just too difficult to find decent firms: “The small ones seem to be all run by crooks and the big ones are all run by the state for the greater good of China”.
There might occasionally be a few in the middle that look alright, but the risks are always high. Aberdeen was at one point interested in private education provider New Oriental Education. Its shares then fell 70% in two days of trading in July after Chinese research specialist and short seller Muddy Waters put out a “strong sell” recommendation on the stock. “Luckily we hadn’t invested,” says Young. “We are quite slow about these things.”
What money Aberdeen does have directly in China (and it has to have some – its dedicated China fund manages $142m of assets) is often in affiliates or listed subsidiaries of Western firms. I ask why that is. Shares in these subsidiaries tend to be much more expensive than those in the parent companies, so why not hold the parents instead?
If you were running a global fund, perhaps you might not have them, says Young, but they make sense for regional funds – Aberdeen holds Unilever Indonesia in its Indonesia fund and Unilever India in its India fund. I’m not entirely convinced on this one, I say. It turns out that Young is a fan of the PEG (p/e to growth) ratio, so in his eyes it isn’t necessarily the case that stocks trading on a high p/e are more expensive than those trading on a low p/e.
After all, he says, if Unilever, the parent, is trading on a p/e of, say, 15 times and growing at, say, 8% a year (giving it a PEG of 15/8 or 1.9 times) and Unilever Indonesia is on 30 times and growing at 15% (so a PEG of two times), they are really much the same price.
It all begins to come back. When I was 22, I worked for SBC Warburg in Tokyo, brokering Japanese stocks to Asia-based clients. One of my clients was a colleague of Young’s at Aberdeen and I spent a significant proportion of my time looking up PEG ratios for him (the rest was spent staring out of the window waiting for earthquakes).
I tell Young this and remind him (as more memories pop into my head) that we last met on one of my trips to visit said colleague in Singapore, back in the mid-1990s. I’m not sure he remembers the visit (although he is far too polite to say so), but he remembers that he was very into PEG ratios in the 1990s too. Between then and now, they have used all sorts of other complicated ways of valuing stocks, but now they have “gone full circle”. You think, says Young, that “it is terribly simple, then terribly complicated and then, after a time, you realise that actually it really is quite simple”.
Asian growth is slowing sharply
I then remember that, as far as my old client was concerned, a PEG of two was far too high. I wonder what Young expects of earnings growth across Asia in the next few years. “Single digits... so very low,” he says. Over the 20-odd years during which Young has been investing in Asia, the firms in his portfolios have averaged earnings growth at some 13%-15%. He is now forecasting something closer to 8%-9%. Does that shift make him feel less confident about Asian investing as a whole? I’m not really expecting a “yes” to this and I don’t get one.
You might have to “write off earnings growth in the next couple of years”, he says. But Asian stockmarkets as a whole are trading on a p/e of around 13 times, which is “ok value”. There aren’t “any issues about balance sheets” – the smaller firms in Aberdeen’s portfolios tend to have net cash and the larger ones have relatively low levels of gearing. Asian firms, just like Western ones, are sitting on cash. Young reckons many of them are assuming that Europe will “implode”.
So they’re being prudent, sitting on cash and “picking up the pieces” on the cheap as they can. One firm Aberdeen holds, for example, is S P Setia, which is part of the Malaysian consortium that’s just bought Battersea Power Station. The idea is that the residential units in the new development will be marketed mainly to Asian buyers. Does that mean that many rich Asians really want to live in London, I ask? They do – it’s all about “pride, prestige and lifestyle”.
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Time, stubbornness, common sense
That said, those three things clearly don’t do it for Young – he has lived in Singapore for around 20 years. We move on to talk about the nature of investing. Hugh likes being on the ground. You don’t, he says, get much more actual information “in an analytical sense” from being based in Asia. It’s all in press releases, accounts and reports anyway.
What you do get is a feeling for whether the information from all those sources is actually true. Time is also important, along with “hard work, stubbornness and common sense”. His team is jammed with people who have been on it for over ten years: “We see the same companies every six months over and over again”.
So, the regular outperformance of Aberdeen funds is all about hard work, knowledge and time? Not quite. “There must be a degree of luck, always,” says Young. That said, he doesn’t agree that poor fund management is simply a function of bad luck. Finance is a “venal industry”, he says. Take those fund managers who claim to be long-term value investors (ie, almost all of them) – if they really were, they wouldn’t perform so badly.
Aberdeen, on the other hand, often really is in it for the long term – Young wants to be an investor, finding good companies and holding them for ever, rather than a speculator. “We still hold the first company that we bought in Indonesia in 1987 – Bintang Beer,” he says. I ask which other managers he respects in the industry. He hums a bit and comes up with Edinburgh’s First State, London’s Silchester International and New York’s Third Avenue. “It’s not a long list, is it?” I say. “How can it be?” he asks, when the market is full of people who “I wouldn’t describe as investors. People turning over their portfolios once a year: that’s not investment”.
Where does he put his money?
I ask him, if he was a retail investor and had to pick one country fund, which one would he pick? He would refuse to do it, he says. Too risky. “Retail investors should avoid country funds.” So who are they for, then? Specialists and big investors wanting “add ons”. When I ask him where his own money is going now I assume that, given our conversation about earnings in Asia, he isn’t putting more of his own (very large) fortune into the area.
Actually, he says, he is. On what possible justification? “You get a bit of yield,” he says, and in the end it will grow faster and “come through quite strongly.” There isn’t much conviction in this, I think. What about India? I ask. Aberdeen has an India Fund. “It’s got some great companies,” he says.
I’m not feeling much conviction and I’m not sure he is either. He makes a good case for the sectors the Indian “government leaves well alone” – pharmaceuticals and IT companies. But he notes that the state-run companies are just as uninvestable as the ones in China and steps back from discussing valuations to tell me the “saddest thing about the job”. It’s the crooks, the inequality, the corruption and the percentage of the proceeds of Asian growth ending up in Swiss bank accounts rather than as investments in education systems and infrastructure – “probably only Singapore has done it well”. Back to where one’s money should be.
If (as he says, Asia expects) Europe collapses, where is safety? He doesn’t believe in gold (it is “old-fashioned nonsense”) but reckons “shares in companies are as safe as you can get”. It doesn’t matter what currency they are denominated in – they are still worth something. And while it is almost impossible to understand what is going on in much of the world much of the time, Young thinks that he always understands “what a decent company is”.
Hugh Young’s top fund
If Young had to buy one of his own company’s funds now and hold it for ten years, what would he select? His largest “active holding” – outside his Aberdeen Asset Management shares, “which were slightly imposed on me” – is the Aberdeen’s Asian Smaller Companies Trust. “I will,” he says, “probably hold it until the day I die, unless the valuations get completely barmy.”
We finish with an argument about the relative performance of a few Japanese funds. I maintain that the Baillie Gifford Shin Nippon Japan Smaller Companies investment trust has outperformed the Aberdeen Japanese Smaller Companies Fund. I have barely arrived back at my office when I receive a set of charts from him, proving his point. His fund has outperformed Shin Nippon over the last five years. I retaliate with a chart showing that Shin Nippon has outperformed his over three. I think that leaves us more or less even.
Who is Hugh Young?
Hugh Young started his career at Fidelity (where he worked with Anthony Bolton) and at MGM Assurance. In 1985 he moved to Aberdeen to manage Asian equity portfolios in London, having become interested in the region following a backpacking trip through India and Nepal. Then, in 1992, he moved to Singapore to co-found Aberdeen Asia. Since then, the company has become one of the largest managers of Asian assets, with 65 fund managers across the region and offices everywhere, from Australia to Malaysia.
He manages several funds directly and, if you look at Trustnet.com, which measures the performance of managers over a career, it seems he does very well. The funds run by Young have gained 330% over the last ten years, while a Peer Group Composite has returned only 222%. Over five years those numbers are 118% and 92% and over three years 44% and 27%. How has he done it? Good stock picking with a strong bias to value has apparently had a “material positive impact on results”.
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